Why Macroeconomics?

J. Bradford DeLongU.C. Berkeley

Econ 101b First Lecture Notes

January 23, 2008

The Longer Run: Looking Backward

• 10,000 years since the invention of agriculture

• Population x1200, average income x14?

• Two great eras:– Malthusian era– Modern economic growth

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The Longer Run: Looking Sideways

• A more unequal world than ever

• Why this extraordinary divergence?

• It’s not that it’s hard to go places, or communicate with them…

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This Morning’s News

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What is happening right now?

We do not really know...

Standard payroll series tend to go awry when the economy changes phase—and it does change phase

Household employment survey a better guide at turning points—but lots of noise

The problem of the anemic employment recovery of the 2000s

The labor market has not changed its phase—yet--as far as we know...

The fact that we undergo a half-sized business cycle every year what with Christmas, etc., makes determining what is going on in these particular months especially... complex...

When the dot-com bubble collapsed at the start of this decade, the Federal Reserve lowered the interest rates it controls far and fast

The hope was to keep employment and production from falling too much: if we can't put people to work in high-tech and investing in the internet and allied industries, perhaps low interest rates can spark a construction boom.

It worked—perhaps too well

Construction did pick up the slack, and was joined as a leading sector of spending and employment by...

Defense

Commerce—side effect of “selling” “political risk insurance” to rich foreigners and foreign governments

Now the construction boom has collapsed—without the Federal Reserve hitting the sector on the head with a brick; construction is not coming back; 2 million extra houses; financial uproar...

What could take up the slack this time? Exports? And import-competing manufacturing? Medicine?

From the 1960s through the 1990s, we had recession when the Federal Reserve said: “Uh-oh, inflation”

The recession of 2001 was the first in a long, long time not brought on by the Federal Reserve's pushing the interest rates it controls upward in order to curb spending and inflation

The potential unpleasantness of 2008 might turn into the second such

The Federal Reserve—stuck between a rock and a hard place

Doesn't want to lose its price-stability credibility by cutting interest rates too far too fast and igniting inflation both through a misjudgment of domestic demand and because cutting interest rates means a weaker dollar, higher dollar prices of imports, hence import price-driven inflation

Wants, in fact, to raise interest rates—to make feckless over-leveraged financiers pay rather than bail them out

But doesn't want to hold the entire economy and the jobs of millions of Americans hostage to make sure a few mortgage loan originators and packagers get their just deserts

Good luck to Ben Bernanke and company...